We are interested in the growth potential of G8 Education Limited (GEM), the second largest player in Australian childcare. Over the past four years, the company has grown revenue by 294%, while expanding their EBIT margin from 16% to 21%. GEM has been very successful in consistently adding value to the centers acquired in this fragmented industry. The government’s proposed overhaul of childcare rebates is likely to expand the pool of families receiving childcare subsidies.
In the medium-term, we expect multiple factors to support the expansion of the childcare industry and occupancy of GEM’s centres, namely increasing female workforce participation and increasing the affordability of childcare for low to middle-income workers via changes to government funding. GEM’s high-end childcare offering had driven consistently higher occupancy than industry averages, a critical measure in determining centre profitability.
In 2015, GEM’s management showed discipline by bowing out of the bidding war to acquire the third largest player in the childcare industry. In our view, GEM represents good value, trading on a forward PE multiple of 14x with a fully franked yield of 6.4%.